The large Australian-owned banks have significantly increased their activity in Asia
over recent years. One indicator of this is the consolidated data in the International
Banking Statistics, which show that the aggregate claims (i.e. exposures)
of all Australian-owned banks on the Asian region were $112 billion at December 2012,
up from $27 billion five years earlier (Graph A1).[1]
Almost all of these claims are due to the four major banks. As a share of their global
consolidated assets, Australian-owned banks' claims on Asia rose from
1.2 per cent to 3.6 per cent
over this period. While their non-Asian foreign claims are still a much higher share
of their global consolidated assets, at around 19 per cent, this share has
been declining (see ‘The Australian Financial System’
chapter).
The Australian banks have recorded strong growth in their exposures
to a range of Asian countries over recent years, although the bulk of their
exposures are to the financial centres of Singapore and Hong Kong, as well
as China and Japan, the two largest economies in the region.

A key motivation for the Australian major banks' expansion into Asia is to facilitate
the large and growing trade and investment flows between Australia and the
Asian region. Accordingly, the banks have been focusing on providing cross-border
banking services (such as trade finance and foreign exchange) to their corporate
clients engaged in trade and other business in Asia, as well as to Asian companies
with activity in Australia. Some of them have also been targeting foreign companies
doing business in Asia, aiming to capitalise on the large and fast-growing
intra-Asian trade and investment flows. A similar trend has been observed in
the other direction, with many Asian-owned banks looking to increase their
involvement in parts of the Australian banking market.[2]
The increased linkages between the Australian and Asian banking systems
can partly be seen as a natural consequence of greater regional economic integration.

Consistent with the Australian major banks' focus on trade and other cross-border
banking services, the majority of their claims on Asia are recorded as ‘international
claims’, which comprise ‘cross-border’ claims (those where
the counterparty resides in a different country to the banking entity that
booked the claim) and local claims of the Australian banks' Asian operations
that are denominated in foreign (i.e. non-local) currency (Table A1). This
is in contrast to the major banks' main overseas markets, New Zealand and
the United Kingdom, where most of their claims are booked through local operations
and are claims on local residents denominated in the local currency.

The bulk of the Australian banks' international claims on Asia have less than
12 months to maturity; this is likely to partly reflect their provision of
trade facilities, which typically have short maturities of up to 180 days.
Some trade facilities, such as letters of credit, are off-balance sheet exposures
though, and are therefore not included in these claims data. Short-dated trade
facilities typically pose smaller funding and credit risks to banks than long-term
lending, and margins on these facilities therefore also tend to be relatively
low. The escalation of the euro area debt crisis and the associated pullback
of some euro area banks from the Asian region in 2011 and early 2012 created
opportunities for Australian banks to expand their trade financing business
in the Asian region. More recently, the improvement in global market sentiment
and increased competition from other banks in the region have reportedly contributed
to a tightening of margins in these markets. Australian banks are also involved
in the provision of long-term corporate loans in Asia, such as through their
participation in syndicated lending, although to a lesser extent than some
large Asian banks that are expanding in the Asian region.

While increasing their institutional and corporate business in Asia has been the
primary focus of the major Australian banks, some of them have also been expanding
into retail banking in a number of Asian jurisdictions, including Hong Kong,
Indonesia, Singapore, Taiwan and Vietnam. In doing so, the banks have generally
targeted certain segments of the retail market, such as more affluent customers
or those with links to Australia, partly because of the difficulties competing
with the larger incumbent banks in the broader retail market.

While all of the major Australian banks have increased their activity in the Asian
region over recent years, ANZ has accounted for a large part of the growth
and its overall exposure to Asia is much bigger than those of the other banks.
Building a larger presence in Asia is a key component of ANZ's ‘super
regional’ strategy that it adopted in 2007. The other major Australian
banks are also looking to grow their businesses in Asia, but their expansion
strategies tend to be more focused on providing cross-border banking services
and less on opening Asian retail and corporate banking operations.

Australian banks have used a variety of business structures to expand into Asia.
Banks' initial moves into Asian markets have tended to involve opening
representative offices or taking minority stakes in existing banks, with the
aim of acquiring knowledge about local banking conditions and customs before
embarking on more extensive expansions. Over recent years, the banks have increasingly
established local branch and subsidiary operations in Asia: the large Australian
banks now hold branch banking licences in a range of jurisdictions (most commonly
China, Hong Kong, India, Japan and Singapore), while ANZ has subsidiary banking
licences in Cambodia, China, Indonesia, Laos and Vietnam (CBA also has a subsidiary
in Indonesia). Some of these local operations were the result of acquisitions,
most notably ANZ's purchase of parts of Royal Bank of Scotland's operations
in Asia in 2009–2010.

A notable feature of the Australian banks' operations in Asia is that local deposits
account for a large share of their funding. Banks' deposit funding exceeds
their lending in many of their Asian operations; surplus funding appears to
be mainly placed in cash and liquid assets. These balance sheet patterns are
reasonably common among banks operating in Asia given the high saving rates
in many of the Asian economies, reinforced by prudential caps on loan-to-deposit
ratios in a few cases.

Australian bank activity in Asia is likely to continue to expand over the longer
term as trade and investment between Australia and Asia grow, and banks look
to capitalise on growth opportunities in Asian banking systems. If expansion
into Asia helps increase and diversify the Australian banks' earnings then
this could be beneficial for them and, potentially, for financial stability.
However, moving into any new market poses a range of risks that banks need
to manage carefully. These risks would probably be heightened if expansion
were overly rapid and not backed by a deliberate and well-founded strategy.

Footnotes

Banks' consolidated on-balance sheet foreign claims in this box are measured
on an ‘immediate risk’ basis – that is, claims are based
on the country in which the immediate counterparty resides. Foreign claims
can also be measured on an ‘ultimate risk’ basis, which are immediate
risk claims adjusted (via guarantees and other risk transfers) to reflect
the country where the counterparty risk ultimately resides. Data on Australian-owned
banks' foreign claims are collected by the Australian Prudential Regulation Authority as
an input to the Bank for International Settlements' International Banking
Statistics. They are available on the RBA website in Statistical Tables
B11.2, and B13.1 to B13.2.1.
[1]

As discussed in ‘The Australian Financial System’
chapter, Asian-owned banks' share of business lending and syndicated
lending in Australia has increased noticeably over recent years. There are
currently 16 Asian-owned banks with on-the-ground operations in Australia;
six of these established their operations since 2010, while others have a
longer-standing presence in the local market.
[2]